Within international business, the word “distribution” is used rather ambiguously to mean both the physical logistics operation and marketing the product. I’m looking at types of international distribution channels today rather than “supply chains”.
It’s important to remember that any kind of route to market changes and evolves over time – look at how mail order catalogues were popular for over 100 years but eventually became redundant with the dawn of online shopping.
Any course on international business will teach you that considering the right way to manage the marketing of your product is a key part of your strategy – talking internationally though, the “right” solution may vary between markets.
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Details change, the basics remain
When boiled down to the simplest form you have 3 options for getting your products from the producer to the final consumer:
- Selling direct without any intermediary or middleman between the producer and consumer (often called D2C – direct to consumer – especially in the online space)
- Using just one intermediary level (B2B2C – business to business to consumer in online speak)
- Having more than one trader as a middleman between the producer and consumer (eg. B2B2B2C)
If you’re looking to sell your products in a range of foreign markets then probably you’ll work with more than one model in detail, but generally speaking, although there are quite a lot of types of international distribution channels most fall under the option 3 above for smaller companies.
Selling direct to the user
If you are an industrial company who sells for example turbines for hydroelectric power stations, chances are that you can sell directly to your customers. This is partly as there are a limited number of such projects available so you can identify where the opportunities are, but also it’s a bespoke kind of project.
On the other hand, if you are selling consumer products it can be harder than you might think to expand internationally by selling directly to the end user.
It seems like it should be deceptively simple: just set up a webshop and you’re good to go right? Not always… You have to consider nasties like sales taxes within your website backend, shipping costs and customs formalities.
What initially seemed like a straightforward transaction can go wrong quite quickly if your customer has to pay an unexpected fee for customs clearance (or duty) because that wasn’t considered in your website set up. I’ve frequently experienced extra charges on small parcels shipped from UK or China because the costs of customs duty and/or customs clearance weren’t considered at source so I just try to avoid having anything sent.
Of course you can outsource those tasks or use specialised software to ensure that everything is done properly (believe me, you don’t want a run in with Customs in any country) but if you’re selling low value orders to individual customers it may not be worth it financially.
On top of that you also have to consider how you are going to market to those overseas clients. You might get some individual orders without specific targeting but it’s not what I’d call systematic export in most cases.
Single Level Distributors as Route to Market Examples
Most of these types of international distribution channels are only employed in really specific circumstances, but as I wanted to give as complete an overview as possible I’ve included them here.
Own Flagship Stores
This is a really expensive option and unlikely to be a first step of choice for most smaller businesses or brands. However in the later stages of your international distribution strategy development, flagship stores could be used in conjunction with an own daughter company in your overseas market to really showcase the whole range of your products
Chances are, this will only be relevant for luxury brands in most cases, but could also be a strategy for outdoor and sports brands.
eg. Chanel, Louis Vuitton, Patagonia, Samsonite
The most realistic “flagship store” type model for a brand starting out, is to have an online flagship store on a marketplace such as Alibaba or Shopee in Asia.
Franchising can be a great International Distribution Strategy
Often when you see familiar brand names on every corner of a foreign country, it’s not down to a massive range of own flagship stores, but to a network of franchisees. If you have a distinct brand that needs to be replicated in each country (think Starbucks, Dairy Queen, McDonalds, Sonnentor) then this can be a successful model as it doesn’t need such a huge amount of capital to get the ball rolling.
You just need to find the right partners who have in depth knowledge of the market, so that they can take your brand expertise and run with it to produce great results in the target market. In these cases, the brand owner needs to have a set of guidelines about what can and can’t be done, whilst the franchisee brings those specialised country insights to the table.
Do you have a product that doesn’t travel well? (Loses quality during the shipping process or has a really short shelf life). Or is it a product that is REALLY expensive to ship around the world? Perhaps there are truly prohibitive import tariffs in some countries (to force you to produce locally)…?
If you can put the quality systems in place to ensure that your quality stays the same then a licensed production might be the answer in this case. Of course, it gives you more flexibility too if a market is large enough to warrant such a project as you will have extremely shortened supply chains.
2 brands who often work under license are Heineken (beer is expensive to ship, & Heineken isn’t an expensive brand to warrant carrying the additional freight charges) and Cadbury’s – chocolate suffers from being transported if the container isn’t temperature controlled.
Directly to Retail
If your export market isn’t too far away from home, then you might consider selling directly to the retail chains there. It has the advantage that you have all the aspects of the deal under your control – your pricing policy in the market, the product range you offer, what marketing activities are acceptable – as well as maximising your margins (or having more room for negotiation as is more likely…).
The disadvantages can outweigh the benefits though for smaller brands. Chances are that you don’t have the in-depth market knowledge to fine tune your market distribution and approach, which can be costly both in terms of the conditions you agree and the mistakes you make. As a newcomer, you don’t have leverage with the chains – compare this to a distributor who already has 10 brands listed there and where the retailer “needs” them (this is a relative term). The other huge disadvantage of delivering directly from the central warehouse in your own home market is the loss of flexibility: you might only be 1 day by truck up the road, but delivering small restocking orders is horribly expensive and the competition might do faster deliveries from their local base.
Sometimes this can work well if the retailer has their own logistics systems though eg with Amazon, where you are not expected to replenish shelves every day but can stock larger quantities in a local warehouse.
Working via an Agent
This is a variation on working directly with retail, in that you as the brand owner hold the contract with the retailer. However an agent can be expected to have deep local market knowledge and connections in order to be able to build the relationships that you need with retail to accelerate your market entry.
Typically an agent is paid on a % commission basis so it can be a low risk entry strategy, but the flip side of this is that the agent will have to represent a number of brands in order to make a living and is likely to focus on the ones which show potential for being most lucrative most quickly.
The legal regulations around working with an agent are also quite complex in many regions, including Europe, so if you are looking to enter into this kind of an agreement, make sure that you consult a lawyer in advance to ensure you don’t get any nasty surprises.
More than One Level in the International Distribution Network
As I mentioned in the beginning, for consumer products at least, this is the most frequent way of designing international distribution channels when starting out.
In many countries you can find export consolidators who are specialised in different product groups ranging from engine spares to food & beverages or toys. These companies don’t actually represent an export sale at first glance for you at all as they are based in your home country but specialise in selling to smaller or complex markets (often where risks are higher).
For you this offers the security of a domestic client (advantages with invoicing and payments, easy to meet etc) combined with a partner who has strong contacts in the market they sell into.
In the best cases, this kind of a partnership can work really well – I’ve used such a route to market for countries such as Pakistan or Libya in the past.
The potential disadvantages are
- if they sell product into your domestic market, thus disrupting your market policies
- your products may be treated as a commodity without any kind of brand building, if the export house doesn’t work with a small number of selected partners but just acts as a kind of cash & carry solution for overseas buyers
- they may sell into markets where you already established sales channels & cause disruption to your contracts there
These points can all be managed by careful management of the partnership, but you shouldn’t just consider this an easy option that needs little nurturing, or a place to get rid of excess stock as then it can easily backfire on you.
Via International Distribution Companies
Working with a distributor in the market is generally the most efficient solution for most brands, especially when just starting out. I even have an entire blog post devoted to the topic of the advantages of working with a distributor in export markets.
Just to briefly summarise: Yes, you have to sacrifice margin BUT you can a partner who has in depth market knowledge and an established reputation on the market you’re looking to enter. If you’ve selected the right partner, this can really be a multiplier to accelerate your brand’s progress.
A distributor will buy the products from you and make contracts with the retailer in their own name usually.
Various Online Models including Cross Border Sales
Whilst I touched on selling directly from your domestic online store to foreign clients, most systematic exports using an online sales model involve 1 or 2 layers in the route to market.
- Your distributor who has imported the goods can sell via their own online store (this can be lucrative and great for gaining market intelligence, but also create conflict with retailers)
- the retail channels in your market probably have their own online stores these days
- the distributor can sell to online retailers such as Amazon or Lazarda
- You could sell your goods to an online retailer
- your distributor could have a flagship store on an online marketplace
- you could sell to specialist online distributor who lists your products on online marketplaces
In China you also have hybrid options where products may be visible on the shelf of a store, but only available to buy online (cross border).
Of course this may appear all a bit overwhelming, but it can be a great way to test a market as you get extremely transparent data when selling online to consumers.
This isn’t really a sales route, but I wanted to include it to mention the possibility. A representative office by definition isn’t allowed to make sales, but is effectively a marketing office that works alongside a distribution partner and helps to coordinate their activities.
A rep office can be a multiplier for a distributor if the chemistry is good, or it can be a huge headache if the 2 parties are at loggerheads & playing “internal politics”, throwing blame around when things go wrong.
Own Company in the Market – the “top of the range” international distribution strategy
This might be considered the “Rolls Royce” of business models for many brands, and for sure it’s an expensive option compared to the others.
Usually this is an “advanced option” – in most cases you don’t want to have a whole sales and marketing organisation running up fixed costs in a market that you didn’t yet enter. Later in your market development though you might decide that the volume of sales has got large enough that you’d like to be able to control things yourself, or the market could be strategically important enough that you don’t want to leave it to a distributor.
Whatever the reason, the transition from a distributor to your own sales organisation is a really delicate balancing act. Realistically speaking this change often takes place when there’s a need to terminate the distributor agreement and a company decides that turnover is enough to justify your own organisation rather than taking a chance of another distributor, who may not focus as you want on your products.
It can be really tricky though, managing teams half way across the world in a different culture, especially at times of crisis.
Analyse all the types of international distribution channels to find your ideal solution
As is so often the case in export, there simply isn’t a simple one size fits all solution to selecting your international channels of distribution. Your route to market plan might look different from one market to the next, but in general you’ll probably want to streamline things as far as is practical in order to keep administration and management costs to a minimum.
You should also consider that markets, consumers and also your needs change over time, so what is the right set up for you this year might not be an ideal solution in five years time. You need to keep your fingers on the pulse of change for each market that you decide to export to and regularly evaluate your systems.
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